Class 3: The Five Forces
MG106 Strategic Management
José Ignacio González Rojas
London School of Economics and Political Science
June 26, 2025
The Cola Wars 🥤
The Paradox
How do companies selling colored sugar water 💧 earn 35% profit margins for over 100 years? 🤔
Today’s Investigation
Using Porter’s Five Forces Framework
1️⃣ Why are concentrate producers so profitable?
2️⃣ How do they control without owning?
3️⃣ Did competition destroy or create value?
4️⃣ What’s their future in a health-conscious world?
15 minutes with your group - Apply the framework!
Discussion Time ⏰
What forces explain the profitability?
Question 1: The Profit Mystery 💰
The Economics Revealed
| Concentrate Producer | Bottler | |
|---|---|---|
| Gross Margin | 83% 📈 | 35% 📉 |
| Pretax Profit | 35% 💎 | 9% 😔 |
| Capital Required | $50M | $75M+ per plant |
| Plants Needed | 1 nationally | 80-85 nationally |
Same industry, vastly different economics
Force 1: Barriers to Entry 🚧
Traditional Barriers
- Brand equity: 100+ years of emotional connection
- Shelf space: Every slot occupied
- Ad efficiency: $10M per share point (Coke) vs $22M (7-Up) 📺
Modern Challenges
- Global distribution: $6B to replicate 🌍
- Exclusive territories: Legal protection
- Consumer identity: “Pepsi Generation”
Zero successful cola entrants in 50+ years
Forces 2 & 3: Suppliers and Buyers 📦💪
Supplier Power: The Secret Recipe
What goes in:
- Caramel coloring
- Phosphoric acid
- Natural flavors
- THE SECRET 🤫
Economics:
- Cost: $0.12
- Sells for: $0.71
- Margin: 83%
- Suppliers have ZERO power
Buyer Power by Channel
| Channel | Power | Profit/Case | Why? |
|---|---|---|---|
| Fountain 🍔 | HIGH | $0.09 | McDonald’s can switch |
| Supermarket 🛒 | MEDIUM | $0.23 | Some negotiation |
| Vending 🎰 | LOW | $0.97 | Captive consumers |
Forces 4 & 5: Substitutes and Rivalry 🔄🥊
The Substitution Paradox
| Drink | Price | U.S. Consumption |
|---|---|---|
| Tap Water 💧 | $0.00 | Available everywhere |
| Coke 🥤 | $1.00+ | 53 gallons/year! |
Smart Competition Rules
Compete ON ✅
- 🎭 Celebrity endorsements
- 📦 Package innovation
- 🎨 Brand extensions
- 🏪 Retail promotions
NEVER Compete ON ❌
- 💰 Concentrate prices
- ⚔️ Direct price wars
- 🏭 Stealing bottlers
Question 2: Control Without Ownership 🔗
The Value Chain Magic
Evolution of Control
1899-1980: Independent bottlers with perpetual contracts
1980s-1990s: Buy bottlers for direct control
2000s: “Anchor bottlers” - equity stakes without ownership
Control the economics, not the assets
Question 3: Competition’s Impact 📊
Who Really Won the Cola Wars?
Who Really Won the Cola Wars?
The Strategic Insight
What the Left Graph Shows 📊
- Others crushed from 45% → 25%
- Combined share grew to 75%
- Competition was targeted, not mutual
What the Right Graph Shows 📈
- Market nearly tripled in size
- Growth accelerated during “wars”
- Rising tide lifted both boats
Smart competitors expand the pie while consolidating share
Question 4: Future Challenges 🔮
The Perfect Storm Approaching ⛈️
Demographic & Health Trends
Population Shifts
- 👴 Aging populations
- 📉 Declining fertility rates
- 🧒 Fewer sugar-craving kids
- 🏥 Health consciousness rising
Market Reality
- Volume growth: 0.2% (vs 3-7% historically)
- Per capita: Flat at 53 gallons
- Non-carbs: 18% growth
- Consumer base: Shrinking
Geopolitical & Economic Pressures
Supply Chain Vulnerabilities
- 🥫 Aluminum prices: Geopolitical tensions
- 🌍 Global logistics: Rising costs
- 💧 Water scarcity: Future constraint
- 🌾 Sweetener volatility: Climate impacts
Information Age Challenges
- 📱 Instant health info: Ingredient awareness
- 🧪 Sweetener concerns: Even “zero” options questioned
- 🎯 Targeted activism: Social media campaigns
- 👥 Peer influence: Health trends viral
Strategic Options for Survival 🎯
Option 1: Fortress 🏰
Defend cola profits
- Harvest cash
- Accept decline
- Focus on loyalists
Risk: Irrelevance
Option 2: Diversify 🧺
Total beverage company
- Buy growth brands
- Leverage distribution
- New categories
Risk: Diluted focus
Option 3: Innovate 🚀
Redefine the category
- Health-forward colas
- Functional benefits
- Sustainable packaging
Risk: Brand confusion
Synthesis: The Five Forces Verdict 🎯
Why CPs Win, Bottlers Struggle
Key Lessons from Cola Wars 📊
Structure Drives Profitability 🏗️
Concentrate producers win through favorable forces while bottlers struggle
Control Beats Ownership 🎯
Shape the value chain without owning the assets
Competition Creates Value 🤝
Cola Wars grew the total market for both players
Advantages Erode ⏳
Health trends and digital disruption challenge dominance
The best strategies shape industry structure to your advantage
Your Project Takeaways 📝
Apply These Insights
- Map all five forces - not just the obvious ones
- Identify who captures value - follow the margins
- Look for force shifts - where is change coming?
- Think beyond rivalry - structure shapes everything
Great strategies work with forces, not against them
Before Tomorrow 📚
Essential Preparation
READ: Airborne Express
Preview: Can focus beat scale?
Different industry, different forces
What would Porter say?